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More Stable Oil Price Can't Come Too Soon for Cyclical Stocks

  • U.S. cyclical/defensive index ratio rises from eight-month low
  • Credit Suisse says buy staffing companies, Fiat, Italian banks

Greater stability in the price of oil is poised to bolster stocks most closely tied to the economy’s performance, according to Andrew Garthwaite, a global equity strategist at Credit Suisse Group AG.

The chart below compares crude-oil prices in New York futures trading with a ratio of U.S. cyclical stocks to shares of defensive companies, which are generally less affected by economic swings. The ratio, based on indexes compiled by FTSE Group, rebounded in the past three weeks from its lowest level since January.

“We believe that the oil price will now stabilize,” Garthwaite wrote yesterday in a report with a similar chart. West Texas Intermediate, the benchmark U.S. crude, has swung between $43 and $50 a barrel since the start of September after a 50 percent plunge in the preceding 12 months.

Oil’s prospects are critical for stocks in general and cyclical shares in particular, the London-based strategist wrote. Lower prices for crude are being viewed as a sign of global economic weakness even though they may be more closely related to supply growth than a demand slump, the report said.

Employment agencies are among cyclical companies with the most to gain from a more constant oil price, according to Garthwaite. He also singled out Fiat Chrysler Automobiles NV and Italian banks.

Crude prices are among five challenges for stocks that Garthwaite cited. The others are rising yields on high-yield debt relative to government securities, weakness in China’s real-estate market, a gap between the Federal Reserve’s interest-rate calls and lower market-based projections, and the potential for technology to disrupt industries.

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